Software stock poised for upside

Digital River may survive e-commerce fallout

By

ThomCalandra

MINNEAPOLIS (CBS.MW) - Shares of Digital River, a battered electronic business company, have weathered a savage downturn in software stocks.

The company's business plan, buying other ravaged Internet companies and folding them into its Minneapolis operation, may be bearing fruit. Digital River
DRIV
is sticking to its game plan of becoming a major software-downloading platform for small and medium-sized businesses, one analyst says.

"The shares have done very well. They are probably continuing to make small acquisitions on the cheap to add to their customer base," says Jeetil J. Patel, who follows Digital River for Deutsche Banc Alex. Brown in San Francisco. "On top of that we have profitability just around the corner." Patel sees Digital River making two cents a share in the fourth quarter.

While far from achieving an Internet recovery, 7-year-old Digital River's efforts may offer hope for dot-com companies that are seen as so much road-kill. "It's not like they're off wanting to become the next chemical services or energy marketplace," Patel said, referring to flailing e-commerce companies that have attempted to take on the Enrons of the world.

Digital River builds Web marketplaces for clients such as Major League Baseball. Also, by purchasing customer lists from competitors that sit on death's door, Digital River CEO Joel Ronning has managed to distribute downloading platforms to tens of thousands of customers, some of them home-office users, who seek software applications from a range of companies, including Autodesk
ADSK, -1.66%
and Novell
NOVL

Digital River's Nasdaq stock, flirting with the $6 level, is at its highest point since May. The unprofitable company could earn 30 cents a share next year if it "sticks to its knitting," said Patel. The company has about $28 million of cash. (Shares of many software companies, as represented by the Goldman Sachs Software Index and other gauges, have declined between 15 percent and 25 percent this month.)

To be sure, Digital River, wanting to be the company that gobbles up weaker competitors, may be in a position to be bought itself. The largest business-to-business and enterprise software makers, like I2 Technologies (ITWO: news, chart, profile), Germany's SAP AG (SAP: news, chart, profile), Oracle (ORCL: news, chart, profile) and PeopleSoft (PSFT: news, chart, profile), are either buying cash-hungry companies or thinking about it.

The last time we talked to Ronning, he turned up his nose at those who might make a run at his tiny company. "Who wants to be acquired at these numbers?" Ronning, a former direct marketing executive, said at the time. "Let's say we make 50 cents a share next year and we're growing at 80 percent. I would feel like we were leaving the dance early."

This time, Ronning was unavailable for comment, the company said Tuesday. While putting out several press releases about various contracts, such as one Tuesday about handling the e-commerce activities of a software company called CADopia, Digital River of late has been tight-lipped about strategy.

Like many companies, Digital River may be hesitant about commenting on its business in the wake of the Sept. 11 terrorist attacks on American soil.

One fund manager who owns shares in Digital River says the company is sitting on several announcements and a sharp upturn in revenues that could double the stock by year's end. The fund manager asked to remain unnamed. Digital River increasingly is taking over the electronic commerce operations of a range of companies. The company is specializing on software providers of computer-aided-design applications and other digital packages that are used by small-business folks.

"They have greater leverage offering a platform for e-commerce services, and you are not buying a suite of products from them like you would be from an SAP, but just one thing or two, like security software or business efficiency software," Patel, the analyst, said. "They may hit the sweet spot of business for small and mid-sized business and offices."

Digital River has about 330 employees and roughly $50 million of yearly sales. Second-quarter revenues doubled from a year ago. Digital River shares Tuesday rose 45 cents to close at $6.10, a far cry from an all-time high of $61.38 in January 1999. Ronning, the CEO, has said he will use a combination of shares and cash to make acquisitions. See the previous StockWatch on Digital River.

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